SECTION 1: Market outlook

1.1 What is the outlook for US investment into your
jurisdiction over the next 12 months, given the new US
administration's protectionist focus?

Japan has not seen any particular downturn in US investments
into Japan since the beginning of the year and we do not
foresee any drastic change at least for the time being.

Recent inbound M&A and other corporate investments from
the US have been focused on industries such as services, IT and
telecommunications and electronics. While the electronics
sector is a key area of export to the US, it seems likely that
any protectionist focus by the Trump administration would be
placed primarily on the automotive sector, the largest
exporting industry to the US.

1.2 Are there any industries in particular that you think
are more likely to be affected by the US's new economic
stance?

As noted above, the automotive industry seems the most
likely to be affected.

SECTION 2: Approving foreign investments

Under the Foreign Exchange and Foreign Trade Act (Fefta), a
foreign investor is required to file a prior notification if
the relevant foreign investment constitutes an inward direct
investment and the Japanese target company is engaged in a
business concerned with national security, public order or
safety and certain other activities. These activities include:
the manufacturing of arms, aircraft, leather and leather goods;
manufacturing related to nuclear energy and space development,
electricity, gas and heat supply; telecommunications and
broadcasting; waterworks and sewage; railway, aviation, marine
and other transportation; security services, agriculture,
forestry and fisheries; and oil refining and other oil-related
businesses.

For purposes of Fefta, a foreign investor would include,
among others:

individuals who are non-Japanese residents;

corporations organised under the laws of
foreign jurisdictions or whose principal offices are located
outside Japan; and

corporations where 50% or more of the
voting rights are held, directly or indirectly, by persons
described in the above mentioned items; or where a majority
of whose officers, or officers having the power of
representation, are non-Japanese residents.

In addition, inward direct investments include, among
others, the following types of investments by any foreign
investor:

acquisition of shares or other interests
in a Japanese non-listed company from any person other than
foreign investors; and

acquisition of shares in a Japanese listed
company, resulting in the holding of 10% or more of the total
issued shares of the target company.

If a pre-notification is required for the inward direct
investment, it must be submitted to the Minister of Finance and
other minister(s) in charge of the relevant industry via the
Bank of Japan within six months prior to the date of
investment.

The waiting period is generally 30 days, commencing on the
day immediately following the day when the pre-notification is
received by the relevant ministers. However, it may be
shortened (normally to two weeks) or extended (up to five
months) by the relevant ministers.

If the relevant Ministers, as a result of their review, find
that the inward direct investment is harmful to national
security, public order or safety, they may recommend the
foreign investor change or suspend the planned inward direct
investment after hearing the opinion of the Council on Customs,
Tariff, Foreign Exchange and other Transactions. The foreign
investor is required to respond to such recommendations within
10 days. If the foreign investor fails to do so, or responds
that it will not accept the recommendation, the relevant
Ministers may issue an order to change or suspend the planned
inward direct investment.

There has been only one case where an order for suspension
was issued. The order was issued in 2008 against a UK-based
activist fund (The Children's Investment Master Fund), which
intended to purchase more than a 10% stake in Electric Power
Development Company, an electric power wholesaler owning
electric power plants (including a nuclear plant under
construction).

2.2 Are there any investment restrictions in specially
regulated sectors and is the government entitled to any special
rights in these sectors?

Examples of Japanese laws containing specific restrictions
on foreign investments include, among others: the Broadcast
Act; the Radio Act; the Civil Aeronautics Act; and the Cosigned
Freight Forwarding Business Act. If the shareholding by a
foreign investor exceeds the applicable threshold, the relevant
business licences granted under these acts may be
terminated.

In addition, as briefly outlined below, under the
abovementioned acts, the shares of a regulated company held by
a foreign investor in excess of a specified threshold (the
excess shares) can be denied entry into the company's
shareholder registry or disenfranchised. The Act on Nippon
Telegraph and Telephone Corporation, etc. has a similar
mechanism. (See box below).

It should be noted that under the Broadcast Act and the Act
on Nippon Telegraph and Telephone Corporation etc, certain
indirect shareholdings by foreign investors, in addition to
their direct shareholdings, are generally counted in
determining whether the applicable threshold is exceeded, which
complicates the relevant rules.

If entry into the shareholder registry is refused, the
foreign investor who owns the excess shares generally cannot
exercise voting rights and other shareholder rights with
respect to such excess shares. On the other hand, payment of
dividends on the excess shares is generally considered to be
permissible, and there are companies that have been doing
so.

Under the relevant acts, the regulated companies are
required to make a public notice as to the ratio of the voting
rights held by foreign investors, subject to certain
requirements. In practice, Japan Securities Depository Center
(a corporation managing the securities settlement system in
Japan) regularly publishes the ratio of the shares directly
held by foreign investors as of the last trading date.

2.3 Which authority oversees competition clearance and give
a brief overview of the merger clearance process?

Under the Act on Prohibition of Private Monopolization and
Maintenance of Fair Trade, prior notification must be filed
with the JFTC in connection with an acquisition of shares
resulting in over 20% or 50% of the total voting rights of the
target company, if aggregated sales in Japan of the acquirer
and the target company (on a consolidated basis) exceeds JPY20
billion ($178 million) and JPY5 billion, respectively. The
waiting period is generally 30 days commencing on the day after
the JFTC receives the prior notification. However, it may be
shortened or extended by the JFTC. If the JFTC finds any
competition issue with regard to the acquisition and the
parties involved do not resolve that issue within the period
designated by the JFTC, the JFTC may issue a cease and desist
order.

2.4 Are there further approval requirements that foreign
investors should be aware of?

While not limited to foreign investments, investments in
financial institutions (such as banks, insurance companies,
securities firms) may be subject to prior approval
requirements, depending on the voting rights held by the
relevant investor. Generally, the applicable threshold is 20%
(in certain cases 15%) and 50%.

3.1 What are the most common legal entities used for US
investment in your jurisdiction?

The stock company (kabushiki kaisha or KK) is the
most common form of business in Japan. In addition, there are
an increasing number of cases where the limited liability
company (godo kaisha or GK) is alternatively used.

In both forms, limited liability of the equity holders is
ensured. Major characteristics of a GK compared to a KK
include:

A GK allows flexibility in designing the
corporate governance structure.

Only a small amount of the registration
tax is imposed upon a GK's incorporation or capital increase
(unless it records the contributed assets into the stated
capital), while a KK is

generally required to pay 0.35% of the amount of contributed
assets as the registration tax.

A GK is treated as a check-the-box entity under US tax
law and, therefore, can be transparent for US tax purposes
(although it is subject to entity-level taxation in
Japan).

A GK is not subject to the requirements of
making an annual public notice of its financial statements,
while such requirements apply to a KK (except in the case of
small companies).

3.2 What are the key requirements for establishment and
operation of these legal entities?

A KK can be established by registering its establishment in
the commercial registry with the competent local legal affairs
bureau. A KK is deemed to be established when the registration
application is received by the bureau.

There are certain steps that must have been followed at the
time of the registration application, including:

adoption of the articles of incorporation;

contribution of assets by the persons
subscribing the shares issued upon formation; and

election of directors and officers.

It should be noted that in certain cases, such as where
contributions-in-kind are made, a court-appointed inspector
conducts an inspection to confirm the assets so contributed are
not over-valued.

For the registration of the establishment of a KK, certain
documents must be submitted, including the articles of
incorporation certified by a Japanese public notary.

The process for establishing a GK is simpler. In the case of
a GK, election of directors and officers are not necessarily
required. Also, unlike a KK, the articles of association do not
need to be certified by a notary public.

For both forms, there are no minimum requirements regarding
the capital amount or number of shareholders. Also, there is no
requirement that any of directors or officers be a Japanese
resident.

SECTION 4: Dispute resolution

4.1 How effective are local courts' enforcement and dispute
resolution proceedings, and what should US investors be
particularly aware of?

Japanese legal enforcement and dispute resolution
proceedings are generally considered fair and impartial,
although there are some points for US investors to note. First,
court procedures frequently take a significant amount of time.
According to a survey conducted by the Japanese court system in
2016, the average period of time from the initiation of court
proceedings to the entry of judgment was approximately 19
months for cases where examination of witness(es) was conducted
(except for certain types of cases that can be expeditiously
resolved). Second, Japanese legal proceedings are conducted in
the Japanese language. Third, while Japan has incorporated
certain US and UK law transactional practices (such as
inclusion of representations and warranties and material
adverse effect clauses in contracts), the lack of Japanese
precedents creates some level of uncertainty as to how Japanese
courts will interpret and apply these clauses.

It should be noted that in certain cases, Japanese courts
have shown a tendency to interpret the text of a contract to be
consistent with what the court considers to be 'equitable';
significantly deviating from the text of contract as written.
In addition, jury trials have not been adopted for civil
cases.

4.2 Does your jurisdiction have a bilateral investment
protection treaty with the US and is that commonly used by
investors?

Japan does not have a bilateral investment protection treaty
with the US. In withdrawing from the Trans-Pacific Strategic
Economic Partnership Agreement, the US expressed a desire to
enter into a bilateral free trade agreement with Japan,
although it remains uncertain whether, when and on what terms
and conditions such agreement will be executed.

4.3 Do local courts respect foreign judgments and are
international arbitration awards enforceable?

A foreign judgment is enforceable in Japan, if the Japanese
court confirms that the following requirements are
satisfied:

(i) The foreign judgment is final and binding.

(ii) The jurisdiction of the relevant foreign court is
recognised by Japanese laws, regulations, conventions or
treaties.

(iii) The losing party was properly served with a summons,
or appeared and presented the merits of the case.

(iv) The content of the foreign judgment and the court
proceedings are not contrary to the public order of Japan.

(v) Reciprocity of judgment recognition exists between Japan
and the county of the relevant foreign court.

The review by a Japanese court should be limited to the
issue of whether the above requirements have been satisfied,
not the appropriateness of the foreign judgment. With respect
to the requirement (iii), however, the Supreme Court has held
that an order for punitive damages made by a foreign court is
contrary to the public order of Japan.

An international arbitration award is generally enforced in
accordance with the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards of 1958, or other
applicable multilateral or bilateral conventions, if the
arbitration award is rendered in a country party to such
convention. In addition, an international arbitration award
rendered in a country that is not a party to such conventions
may also be enforceable under the Arbitration Act of Japan by
satisfying the requirements equivalent to the New York
Convention.

SECTION 5: Forex controls and local operations

5.1 What foreign currency or exchange restrictions should
foreign investors be aware of?

Japanese foreign currency or exchange controls are generally
liberalised. In certain limited cases (such as a transfer of
funds to certain sanctioned countries), the transfer of funds
either from Japan or between a Japanese resident and a
non-Japanese resident may be prohibited or require certain
procedures depending on the location of the recipient, the
purpose of such funds transfer and other factors.

SECTION 6: Tax implications

6.1 Are there tax structures and/or favourable intermediary
tax jurisdictions that are particularly useful for US investors
into the country?

Since there is a tax treaty between the US and Japan in
force (the Treaty) whereby the taxation of Japan as a source
country is fairly limited, US investors tend to invest in Japan
in reliance on the Treaty. While there are no particularly
prevalent tax structures for US investment in Japan, some US
investors prefer to use a Cayman exempted limited partnership
or a similar entity established in another jurisdiction as an
intermediary. The use of a Japanese limited partnership is
quite rare due to potential tax risks regarding Japanese
permanent establishment and withholding tax on the distribution
of profits of the partnership.

6.2 Has your jurisdiction benefited from the recent trend
of US companies pursuing inversion structures? If yes, do you
believe this will be threatened under the new
administration?

It appears that Japan is not a proper jurisdiction for a US
multinational company to relocate its headquarters due to the
relatively high corporate tax rate and language issues.
Therefore, we do not see any particular benefit for US
companies in seeking an inversion in Japan.

6.3 What are the applicable rates of corporate tax and
withholding tax on dividends?

The effective tax rate for a corporation's income is
approximately 30%. Dividends payable by a Japanese corporation
to a non-resident individual or foreign corporation is subject
to withholding tax at 20.42% under domestic law. However, if
certain conditions under the Treaty are met, a US portfolio
investor will be entitled to a five percent or 10% reduced
rate, and a US parent company will be exempt from the
withholding tax on dividends from its Japanese subsidiary.

6.4 Does the government have any tax incentive schemes in
place?

The Japanese government promotes foreign investment in Japan
by giving grants, subsidies and tax incentives, but these are,
in general, temporary and not permanent. It would be advisable
to contact a Japanese expert to check the schemes currently in
effect. There are also other grants and incentive programs that
are available to both domestic and foreign businesses.

6.5 Are there any reciprocal tax arrangements between your
jurisdiction and the US? If so, how can they aid
investors?

As described above, there is a tax treaty between the US and
Japan in force whereby the taxation of Japan as a source
country is fairly limited. For the applicable reduced rate or
exemption for dividends, please refer to Section 6.3 above.

6.6 Do you think that the introduction of new rules and
regulations in the US, such as the Bring Jobs Home Act, is
likely to have an impact on investment into your country?

This depends on the contents of the new rules and
regulations, but, in general, since the Japanese market is
fairly independent and mature, the potential impacts would
likely not be high.

Masakazu Kumagai specialises in capital markets (in
particular, equity public offerings, PIPES and other
private placement deals), M&A and private equity
fund matters. Leveraging on his broad range of
expertise, he has extensive experience in handling
cross-border M&A/investments as well as complex,
cross-disciplinary transactions. He is a graduate of
the University of Tokyo (LLB, 2004) and the University
of Chicago Law School (LLM, 2011). He worked at the
Ministry of Economy Trade and Industry (from 2007 to
2009), where he played a policy-making role primarily
in the areas of M&A and corporate governance. He
also worked at Shearman & Sterling in New York
(from 2011 to 2012).

Hiroyuki Kurihara works primarily in tax, M&A
and corporate finance, with a particular focus on tax.
As a tax expert, he has advised a number of
international clients (including US investors and
companies) on tax planning for clients to invest in
Japan with a tax-efficient structure. He was admitted
in Japan in 2008 and in New York in 2016. He is also a
licensed tax accountant in Japan since 2017 and a
chartered member of the Securities Analysts Association
of Japan since 2016. He graduated from the University
of Tokyo, School of Law (JD, 2007, magna cum laude),
Stanford Law School (LLM in corporate governance and
practice, 2015), and the New York University School of
Law (LLM in international taxation, 2016, Flora S and
Jacob L Newman Award).

Kurihara has written numerous books and articles,
including Tax Reform 2017: Impacts on M&A
Practice (Accounting & Audit Journal, June
2017), Latest Issues on the Anti-Inversion Rules in
the US (Monthly International Taxation, November
2016), Comprehensive Analysis of M&A Laws of
Japan (Yuhikaku Publishing Co, 2015, co-author)
and Implications of the Apple Case for
International Tax Strategy Concerning Intangible
Assets (Junkan Keirijouhou No. 1356, 2013,
co-author).